Economic Quarterly

2003

Spring 2003

Unemployment Insurance and Personal Bankruptcy

As an implicit form of insurance, bankruptcy may augment, substitute for, or limit other forms of insurance. Conversely, the presence of other forms of insurance may enhance or limit the usefulness of bankruptcy. An investigation of the interaction between one of the largest social insurance schemes, the U.S. unemployment insurance system (UI), and the personal bankruptcy system reveals several findings. First, in the benchmark economy, introducing bankruptcy under even low UI replacement ratios lowers welfare. Second, reducing the UI replacement ratio lowers welfare slightly and increases bankruptcy rates. Third, bankruptcy lowers asset trade and makes the distribution of wealth more equal. Fourth, UI is more important than bankruptcy: if society must choose either UI or bankruptcy, it should choose UI. Last, bankruptcy's role in providing insurance is clearly dependent on the existing social safety net.